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Purposes for which Funds for a New Business is Needed

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Some of the main purposes for which funds for the new business is generally needed are: 1. Promotion expenses 2. Organizational expenses 3. Cost of fixed assets 4. Cost of current assets 5. Cost of establishing or developing the business and 6. Cost of financing.

Before the management an enterprise tapping various sources of finance, it is necessary to estimate or determine its financial requirements. As far as possible, efforts should be made to have fair capitalisation. In order to avoid over-capitalisation and under-­capitalisation, it is desirable to estimate the requirements of funds properly when a company is being promoted or when it is launching expansion programmes.

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The purpose for which the fund for the new business will be needed may be classified as follows:

1. Promotion expenses:

These expenses are incurred before the incorporation of a company. These include preliminary expenses incurred on investigation of the project, legal and technical advice.

2. Organizational expenses:

These expenses are incurred in legally forming and incorporating the company, such as lawyers’ fees, filing fees and organisation or incorporation fees, office expenses including remuneration paid to staff. All these expenses are usually grouped together under the title “Preliminary Expenses”.

3. Cost of fixed assets:

Large amount of funds are needed for purchasing assets permanently required and employed in the business. These assets include land and building, plant and machinery, furniture and fixtures etc. The amount invested on such assets is known as fixed capital.

4. Cost of current assets:

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The sufficient amount of cash or liquid capital i.e., working capital is required to finance current assets like stock of goods, raw- materials, semi-finished goods, account receivables etc.

5. Cost of establishing or developing the business:

Normally, large scale undertakings take few years to reach the break-even stage {i.e., no profit-no loss.) In the beginning, these have to incur operating losses. A good financial plan must make a provision for such losses.

6. Cost of financing:

It is not easy to raise finance from the public especially for new companies. Various expenses are to be incurred for procuring capital from various sources by issuing various securities. A corporation has to incur some expenses on advertisement, brokerage and commission etc., to market securities.

For the purposes of getting the securities listed in the stock exchange at least 49% of issued capital should be offered to the public under the securities contract (Regulation) Act. Due to this requirement the cost of financing has increased considerably in the recent times. Such expenses should be taken into consideration while estimating the capital requirements.